10/17/2016. Analyzing Controlled and Affiliated-Service Groups. Kelsey N.H. Mayo, J.D. Partner Poyner Spruill LLP

Transcription

1 Analyzing Controlled and Affiliated-Service Groups Kelsey N.H. Mayo, J.D. Partner Poyner Spruill LLP 1

2 WHY CONTROLLED GROUPS AND AFFILIATED-SERVICE GROUPS MATTER Why Does It Matter? Compliance begins with knowing the CG-ASG Places it might matter include: Nondiscrimination testing Counting service Distribution timing Loans 2

3 Nondiscrimination Testing All employees in CG-ASG count in determining compliance with certain requirements, including: Minimum coverage Benefits rights and features 5 Nondiscrimination Testing If two or more plans are maintained by CG- ASG, compliance must be coordinated. Including compliance with: 402(g) contribution limits Top-heavy testing 415 contribution limits Safe-harbor compliance 6 3

4 Counting Service All service in the controlled group must be counted for certain purposes: Eligibility service Vesting service Plan might credit service for other purposes as well 7 Example: Eligibility Service If an employee transfers from another employer in the controlled group, must give them credit for that service for eligibility Example Corp A and Corp B are in a controlled group, and each maintain a different plan Dennis works for Corp A for five years and then transfers to Corp B 8 4

5 Distributions Employee is not eligible for distribution if he or she is employed anywhere within CG-ASG Must terminate from all entities before distribution 9 Plan Loans Limits on loans are aggregated among all plans in the CG-ASG If CG-ASG has two 401(k) plans, employee cannot have a $50,000 loan in each plan 10 5

6 DETERMINING CONTROLLED GROUPS Types of Controlled Groups Parent-subsidiary Brother-sister Nonprofit Combinations 6

7 Control Group Overview Does one organization have at least 80% interest in the other organization? Do organizations have overlapping ownership? Is this a nonprofit organization? Do five common owners have at least 80% combined interest in each organization? Are 80% of the directors either representatives of or controlled by the other organization? Do same five common owners have more than 50% combined interest, when only identical interests are considered? Have the entities voluntarily aggregated? Parent-Subsidiary Controlled Group Brother-Sister Controlled Group Nonprofit Controlled Group Not a Controlled Group Parent-Subsidiary One or more entities connected through ownership with a common parent Parent entity owns 80 percent of at least one other entity PLUS each other entity that is owned at least 80 percent by other entities in the group 14 7

8 Parent-Subsidiary Example Corporation A Corporation B Corporation C Corporation D Corporation E Corporation F Control Group Overview Does one organization have at least 80% interest in the other organization? Do organizations have overlapping ownership? Is this a nonprofit organization? Do five common owners have at least 80% combined interest in each organization? Are 80% of the directors either representatives of or controlled by the other organization? Do same five common owners have more than 50% combined interest, when only identical interests are considered? Have the entities voluntarily aggregated? Parent-Subsidiary Controlled Group Brother-Sister Controlled Group Non-Profit Controlled Group Not a Controlled Group 8

9 Brother-Sister Group Group of two or more organizations with common ownership Five or fewer common owners have Controlling interest Effective control 17 Brother-Sister Group Controlling interest Five or fewer owners have at least 80 percent ownership in each entity Considering entire interest in each entity Effective control Five or fewer owners have more than 50 percent ownership in each entity Considering only identical interest in each entity 18 9

10 Brother-Sister Example Owner Corp A Corp B Corp C Corp D Craig 100% 20% 40% 51% Judy 0% 20% 20% 0% Brian 0% 20% 10% 9% Elizabeth 0% 20% 10% 20% Ray 0% 20% 20% 20% 19 Brother-Sister Example Owner Corp B Corp C Total Identical Total Identical Craig 20% 20% 40% 20% Judy 20% 20% 20% 20% Brian 20% 10% 10% 10% Elizabeth 20% 10% 10% 10% Ray 20% 20% 20% 20% Total 100% 80% 100% 80% Brother-Sister Group Controlling Interest and Effective Control 20 10

11 Example: Brother-Sister Controlled Group Owner Corp A Corp D Total Identical Total Identical Craig 100% 51% Judy 0% 0% Brian 0% 9% Elizabeth 0% 20% Ray 0% 20% Total 100% 100% Is this a Brother-Sister Controlled Group? 21 Brother-Sister Controlled Group Owner Corp A Corp D Total Identical Total Identical Craig 100% 51% 51% 51% Judy 0% 0% 0% 0% Brian 0% 0% 9% 0% Elizabeth 0% 0% 20% 0% Ray 0% 0% 20% 0% Total 100% 51% 51% 51% No - This is not a Brother-Sister Controlled Group Although there is effective control, there is not a controlling interest because you count only Craig s interest (and that is less than 80%) 22 11

12 Brother-Sister Controlled Group A B D C Assume: A and D are in controlled group D is in a controlled group with B and C BUT A is not in a controlled group with B and C What to do? 23 Brother-Sister Controlled Group A D B C What to do? Test the two groups separately Corp D gets tested twice Once with A Once with B and C 24 12

13 Control Group Overview Does one organization have at least 80% interest in the other organization? Do organizations have overlapping ownership? Is this a nonprofit organization? Do five common owners have at least 80% combined interest in each organization? Are 80% of the directors either representatives of or controlled by the other organization? Do same five common owners have more than 50% combined interest, when only identical interests are considered? Have the entities voluntarily aggregated? Parent-Subsidiary Controlled Group Brother-Sister Controlled Group Non-Profit Controlled Group Not a Controlled Group Nonprofit-Controlled Groups Nonprofits may not have stock or ownership interests So, the tests just discussed may not be applicable Treasury issued special regulations (at the same time as the 403(b) regulations) Does not apply to certain church (or churchcontrolled) organizations 26 13

14 Nonprofit-Controlled Groups Nonprofit is in controlled group if: Meets parent-subsidiary or brother-sister test Eighty percent of the nonprofit directors are Representatives of other entity Or are controlled by other entity Or entities have voluntarily aggregated Permitted in limited circumstances 27 Nonprofit-Controlled Groups Representative of other entity Trustee or director Employee or other agent Controlled by other entity Power to remove trustee and designate new trustee Facts and circumstances 28 14

15 Nonprofit-Controlled Groups Voluntary aggregation Two nonprofit organizations Regularly coordinate their day-to-day activities Nonprofits may treat themselves as under common control Single-employer retirement plan Health plan may be actual driving factor 29 Facts Nonprofit Example Nonprofit hospital and nonprofit medical clinic in Charlotte, NC are not related entities They coordinate staffing and training They coordinate budgeting and goals May the hospital and medical clinic treat themselves as part of a controlled group? 30 15

16 Combined Groups One entity is in both a parent-subsidiary (or nonprofit) group and a brother-sister group Treated as a single controlled group 31 Controlled Group Attribution For controlled groups use Code 1563(a) attribution rules Written in terms of stock Apply similar rules to other entities If a trust or estate rules, look at interest in the trust or estate If a partnership, look at the capital or profits interest If an LLC, apply rules based on how the LLC is taxed (either as a corporation or partnership) 32 16

17 Family Attribution Spouse: Interest is generally attributed to other spouse Unless Spouses are legally separated Or all the following requirements are met 33 Spouse: Family Attribution Attributable UNLESS The other spouse has no direct ownership in the entity The other spouse has no participation in the entity Not an employee Not involved in management No more than 50 percent of gross income is passive (rents, royalties, dividends, interest, etc.) Interest is not subject to restrictions in favor of spouse or minor (under 21) children 34 17

18 Family Attribution Spouse: Note, these requirements might not be able to be met in a community-property state Spouse is deemed to own 50 percent of stock owned by spouse (assuming the stock is community property) 35 Children to parents Family Attribution Parent deemed to own child s interest BUT ONLY IF Child is under age 21 Or parent controls more than 50 percent of entity 36 18

19 Family Attribution Parents to children Child deemed to own parent s interest BUT ONLY IF Child is under age 21 OR child controls more than 50 percent of interests 37 Example: Family Attribution Ownership of Corp A Kelsey owns one-third of Corp A Nicole, Kelsey s 19 year-old child, owns one-third Will, Kelsey s 25 year-old child, owns one-third How much of Corp A is Kelsey deemed to own? How much of Corp A is Nicole deemed to own? 38 19

20 Family Attribution Ownership of Corp A Kelsey owns one-third directly Nicole, Kelsey s 19 year-old child, owns one-third Will, Kelsey s 25 year-old child, owns one-third Kelsey is deemed to own 100 percent Kelsey is automatically attributed Nicole s one-third interest because she is under 21 giving Kelsey effective control of two-thirds Because Kelsey has effective control of two-thirds, Will s one-third interest is attributed to Kelsey 39 Family Attribution Ownership of Corp A Kelsey owns one-third directly Nicole, Kelsey s 19 year-old child, owns one-third Will, Kelsey s 25 year-old child, owns one-third Nicole is deemed to own two-thirds Nicole is automatically attributed Kelsey s one-third interest because she is under 21 giving her twothirds Although Will s interest is attributed to Kelsey, it is not attributed again to Nicole (no double attribution) 40 20

21 Family Attribution Grandparents to grandchildren Only if grandchild owns more than 50 percent of the business Grandchildren to grandparents Only if grandparent owns more than 50 percent of the business Siblings No attribution 41 Organizational Attribution Corporation to shareholder Shareholder owns at least five percent of corporation Attributed proportionate share Partnership to partners Same rule Trust to beneficiaries Same rule (but applies more broadly) 42 21

22 DETERMINING AFFILIATED-SERVICE GROUPS Types of Affiliated-Service Groups A-Org Group B-Org Group Management Service Group Combinations 22

23 ASG Basics A-Organization Group First Service Organization (FSO) and at least one A Organization B-Organization Group First Service Organization (FSO) and at least one B Organization Management Service Group Management organization and one other entity 45 ASG Basics First Service Organization Must be a service organization Capital is not a material income-producing factor Facts and circumstances Organizations in following fields are deemed to be service organizations: Accounting Actuarial science Architecture Consulting Engineering Health Insurance Law Performing arts 46 23

24 Affiliated-Service Group Overview Is the entity a service organization? Does entity regularly perform services for the FSO? Is entity regularly associated with FSO in performing services for third parties? Entity owns interest in FSO? Significant portion of entity s business is service to FSO or A Org? Services are historically performed by employees in service field of FSO or A-Org? 10% of entity is owned by designated members (officers, HCEs, common owners) of FSO or A-Org? Principal business of entity is performing management services for another entity (or related group of entities) A-Org ASG B-Org ASG Management Service Org Not an ASG A-Organization Group Requires FSO and A-Org A-Org Is a service organization Has ownership interest in FSO Regularly performs services for the FSO or is regularly associated with the FSO in performing services for third parties 48 24

25 A-Organization Group Regularly Facts and circumstances Factor: amount of income derived from services performed for FSO or from services associated with FSO 49 Facts: Example: A-Organization Kelsey owns 100% of Corporation A Corporation A owns one percent of Poyner Spruill Kelsey provides services to Poyner Spruill clients through Corporation A, Kelsey has Poyner Spruill business cards, etc. Are Corporation A and Poyner Spruill an A-Org ASG? 50 25

26 B-Organization Group Requires FSO and B-Organization B-Organization Significant portion of business is performance of services for an FSO or for A-Orgs associated with FSO (or both) Services are type historically performed by employees Ten-percent ownership requirement met 51 B-Organization Group Significant portion of business Facts and circumstances BUT safe harbors Less than five percent of service receipts = not significant At least ten percent of total receipts = significant Look at greater of percent for year of determination or three-year period ending in year of determination 52 26

27 Significant Portion Corp A has the following receipts for the last three years: All Clients Law Firm 2014 Service Receipts $100,000 $5,000 Total Receipts $200, Service Receipts $300,000 $6,000 Total Receipts $600, Service Receipts $400,000 $8,000 Total Receipts $600,000 Is a significant portion of Corp A s business providing services to the law firm? 53 Significant Portion Corp A has the following receipts for the last three years: All Clients Law Firm 2014 Service Receipts $100,000 $5,000 Total Receipts $200, Service Receipts $300,000 $6,000 Total Receipts $600, Service Receipts $400,000 $8,000 Total Receipts $600,000 Ratio One-year Three-year Service Receipts $8k/$400k = 2% $19k/$800k = 2.375% Total Receipts $8k/$600k = 1.5% $19k/$1400k = 1.36% 54 27

28 B-Organization Group Historically performed by employees For a particular service field, if it were not unusual for the services to be performed by employees of organizations in that service field In the U.S. on December 13, B-Organization Group Ten percent ownership test At least ten percent of B-Org is owned by Officers, HCEs, or common owners of FSO or A-Orgs Common owner = someone who owns at least three percent of FSO or A-org 56 28

29 Example: B-Organization Facts: Four law firms decide to create Corporation A to provide legal assistant support HCEs of each firm owns 25 percent of Corporation A Each firm accounts for 25 percent of Corporation A s gross receipts Is there a B-Org ASG here? 57 B-Organization Example Significant portion of entity s business is service to FSO or A-Org? Services are historically performed by employees in service field of FSO or A-Org? Yes, greater than ten percent of gross receipts Yes, secretaries are normally employees 10% of entity is owned by designated members (officers, HCEs, common owners) of FSO or A-Org? Yes, Corp A owned 25 percent by HCES of FSO (the law firm) B-Org ASG 29

30 Affiliated-Service Group Overview Is the entity a service organization? Does entity regularly perform services for the FSO? Is entity regularly associated with FSO in performing services for third parties? Entity owns interest in FSO? Significant portion of entity s business is service to FSO or A-Org? Services are historically performed by employees in service field of FSO or A-Org? 10% of entity is owned by designated members (officers, HCEs, common owners) of FSO or A-Org? Principal business of entity is performing management services for another entity (or related group of entities) A-Org ASG B-Org ASG Management Service Org Not an ASG Management Service Organization Two organizations One performs management functions Principal business of management organization is Performing management function On a regular and continuing basis To a recipient organization No need for overlapping ownership 60 30

31 Management Service Organization Management functions, examples: Running daily business operations Personnel decisions Setting compensation and benefits Goal setting and planning 61 Management Service Organization Principal business Facts and circumstances test Tests in withdrawn regulations Two-year rolling percentage Gross receipts 62 31

32 Affiliated-Service Group Attribution For affiliated-service groups Use Code 318 attribution rules Different than the controlled group rules 63 Family Attribution Spouse: Interest is generally attributed to other spouse No exception for limited involvement 64 32

33 Family Attribution Children to parents Parent deemed to own child s interest No exception for age or ownership interest Parents to children Child deemed to own parent s interest No exception for age or ownership interest 65 Family Attribution Grandparents-grandchildren No attribution Siblings No attribution 66 33

34 Attribution to Organization Shareholder to C corporation Shareholder owns at least 50 percent of corporation Attributed shareholder s interest Partners to partnership Attributed partner s interest Beneficiaries to trust Attributed beneficiary s interest 67 Example: Family Attribution Ownership of Corp A Kelsey owns one-third of Corp A Nicole, Kelsey s 19 year-old child, owns one-third Will, Kelsey s 25 year-old child, owns one-third How much of Corp A is Kelsey deemed to own? A. One-third B. Two-thirds C. Three-thirds 68 34

35 Family Attribution Ownership of Corp A Kelsey owns one-third directly Nicole, Kelsey s 19 year-old child, owns one-third Will, Kelsey s 25 year-old child, owns one-third Kelsey is deemed to own 100 percent Kelsey is automatically attributed both Nicole s one-third interest and Will s one-third interest Age of children does not matter 69 Family Attribution Ownership of Corp A Kelsey owns one-third of Corp A Nicole, Kelsey s 19 year-old child, owns one-third Will, Kelsey s 25 year-old child, owns one-third How much of Corp A is Will deemed to own? 70 35

36 Family Attribution Ownership of Corp A Kelsey owns one-third directly Nicole, Kelsey s 19 year-old child, owns one-third Will, Kelsey s 25 year-old child, owns one-third Will is deemed to own two-thirds Will is attributed Kelsey s one-third interest giving him two-thirds Age does not matter Although Nicole s interest is attributed to Kelsey, it is not attributed again to Will (no double attribution) 71 Questions? 36